Ontario Releases Consultation Paper on Framework for Target Benefits

March 16, 2023

Anthony Guindon

On March 14, 2023, the Ontario Ministry of Finance released its long-anticipated consultation paper on the regulatory framework intended to govern target benefit plans, “A Permanent Framework for Target Benefits.”  The proposal can be accessed online at https://www.ontariocanada.com/registry/view.do?postingId=44107&language=en.

BACKGROUND

In 2007, the Ontario government introduced temporary funding measures, permitting multi-employer pension plans that satisfied prescribed criteria to elect to be treated as specified Ontario multi-employer pension plans (“SOMEPPs”), and so be exempt from solvency funding requirements.  While these regulations were intended to be temporary, pending the development of a new funding regime, the regulations have been renewed a number of times, with the current extension due to expire in 2024.  While legislative changes (not yet in force) and consultations have been ongoing (most recently in 2015 and 2018), the government has yet to adopt a final framework governing target benefit pension plans.

PROPOSED FRAMEWORK

Governance Requirements

Target benefit plans would be required to adopt governance and funding policies, which will have to be filed with the Financial Services Regulatory Authority of Ontario (“FSRA”) within 60 days of a plan’s conversion to a target benefit plan.  These plans would be subject to review by the administrator triennially, and any changes would have to be filed with FSRA within sixty days of the effective date of such changes.

Communication Requirements

Target benefit plans would be subject to enhanced member communication requirements, including disclosures concerning the potential for benefit reductions, the plan’s funding policy, and a statement that benefits are not guaranteed by the PBGF.

Funding Requirements

As is the case for existing SOMEPPs, target benefit plans would be exempt from solvency funding requirements, but would be required to include a solvency valuation in any filed actuarial valuation report filed with FSRA.  These would still be required to be prepared and filed on a triennial basis, unless the plan’s funding on a going concern basis falls below 85%, in which case annual reports would have to be prepared and filed.  Going concern deficiencies would continue to be subject to a 12 year amortization period, but schedules of going concern special payments would not be redetermined in each valuation report.  However, if previously scheduled special payments were not required to satisfy funding requirements, existing schedules could be shortened (though the monthly rate of special payments would remain the same if some are still needed).

The commuted value of benefits would be determined in accordance with the Canadian Institute of Actuaries new standard of practice introduced in 2020, using going concern assumptions.

Target benefit plans would be subject to more stringent funding requirements than the existing SOMEPP regime, with the introduction of a provision for adverse deviation requirements (“PfAD”).  The PfAD would be funded in respect of the plan’s normal cost as well as any increase in a plan’s going concern liabilities due to benefit improvements, and would be based on two factors: 1) a non-fixed income, including 50% of the value of a plan’s alternative investments, such as real estate and infrastructure (“NFI”) portion, and a benchmark discount rate (“BDR”) portion, tied to the federal government’s long-term bond rate, plus a risk premium based on the plan’s target asset mix.

The new funding framework would permit benefit improvements regardless of a plan’s funded status; however, any increase in going concern liabilities and the PfAD would have to be funded over 10 years.

Target benefit plans would be prohibited from funding a plan’s normal cost or PfAD in respect of the normal cost using the plan’s surplus.

Finally, no multi-jurisdictional plans would be permitted to provide target benefits where 10% or more of the plan’s membership is in a jurisdiction that does not allow for the reduction of accrued benefits.

Conversions

Existing multi-employer pension plans (“MEPPs”) and SOMEPPs would not automatically become subject to the new target benefit regime.  In order to continue as target benefit plans, existing MEPPs and SOMEPPs would be required to apply to the CEO of FSRA for regulatory consent for the conversion of a plan to a target benefit plan, in accordance with the previously enacted (but not yet in force) provisions of s. 81.0.2 of the Pension Benefits Act (the “PBA”).  Applications for conversion would include copies of notices of conversion provided to plan members, a copy of proposed plan amendments, a statement certifying that the administrator has consulted with any applicable trade union, and a certification from the administrator that the criteria under the PBA had been satisfied.

Existing SOMEPPs that do not convert to target benefit plans by the plans’ first valuation date after January 1, 2024 would be subject to the general funding rules applicable to MEPPs that provide defined benefits.  However, plans would be provided five years following the conversion to target benefit plans to comply with target benefit funding rules if the new contribution requirements were greater than the contribution requirements existing prior to the conversion.

CONCLUSION

The proposed framework largely replicates many of the features of the existing SOMEPP framework that has, since 2007, proven to adequately protect plan members’ benefit security, while making such plans affordable.  However, the introduction of a PfAD, particularly one partially determined with reference to government of Canada long-term bond rates, risks to introduce unacceptably high volatility in funding requirements, particularly considering the fact that most multi-employer plans are collectively bargained, with contributions determined on multi-year collective bargaining cycles.  The introduction of a PfAD could also render these plans unaffordable, requiring significant increases in negotiated contributions, or cuts to benefits (either accrued or prospective).

The experience of jurisdictions such as Alberta and British Columbia, both of which introduced similar PfAD formulas in 2014 and 2015 respectively, should serve as cautionary warnings in this regard.  In the case of British Columbia, average PfADs varied widely between 2015 to 2020, from a low of 17% in 2015 up to a high of 28% in 2020.[1]  As a result, British Columbia recently introduced a new PfAD formula in its pension regulations, determined at a fixed rate of 7.5%, plus a supplementary percentage determined at the discretion of the plan administrator.  Alberta has also undergone a consultation process, and is expected to release revisions to its PfAD requirements later this year.

The existing SOMEPP framework has served Ontario plan members well since 2007, and the introduction of a PfAD, particularly one tied to long-bond rates, risks unduly burdening these plans.  Interested stakeholders should study the proposal closely, to determine the potential impact the proposed funding changes could have on existing SOMEPPs.

The Ministry of Finance has set a deadline of June 30, 2023 to receive public comments on the proposed framework.  These may be submitted to:

A Permanent Framework for Target Benefits
Pension Policy Branch
Ministry of Finance
5th Floor, Frost Building South
7 Queen’s Park Crescent East
Toronto, ON
M7A 1Y7

or

Contact Email: pension.feedback@ontario.ca

[1] See “Definition of target benefit plan PfAD reformed – Special Notice, October 14, 2022,” Eckler, online at https://www.eckler.ca/british-columbia-amends-pension-benefits-standards-regulations/; see also BCFSA’s 2022 Report on Pension plans Registered in British Columbia, October 7, 2022, online at https://www.bcfsa.ca/about-us/news/industry-communications/bcfsas-2022-report-on-pension-plans-registered-british-columbia

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